Dow Jones Index Drops as Higher Rates Are on the horizon, and this can lead to a Recession

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After Federal Reserve Chair Jerome Powell cautioned investors that further rate hikes are on the horizon, the Dow Jones Industrial Average dropped 0.3%, or 102 points, on Wednesday.

Inflation, which came in at 4% in May, was still too high, according to Powell, who spoke before the House Financial Services Committee. He predicted that the Fed would likely have to raise interest rates once more to get inflation back to its goal level of 2%. The comments caused equities to decline, particularly rate-sensitive tech companies, Which contributed to declines; in the S&P 500 and Nasdaq.

Recently, JPMorgan issued a strong warning statement on stocks, stating that the effects of rising rates have “yet to be felt” and that “Recession Will Likely Be Necessary.”

The U.S. economy grew at an annualized pace of 1.3% in the first quarter, defying prior recessionary projections. However, JPMorgan Chase & Co. asserts that using the “R word” might not be possible.

That is an outcome of the U.S. Federal Reserve’s aggressive interest rate rises, Which were implemented to curb increasing inflation.

In a recent note to investors, JPMorgan strategists led by Marko Kolanovic stated that while the economy’s recent resilience may delay the start of a recession, they believe that most of the lag effects of the previous year’s monetary tightening have yet to be felt and that ultimately a recession will likely be required to bring inflation back to target.

Even if the stock market has rebounded significantly—the S&P 500 is up 15% in 2023—Kolanovic’s crew is still being cautious.

Given the disconnect between equities and bonds, the high likelihood of a recession over the upcoming quarters, high rates, tightening liquidity, rich valuations, and the still-narrow market breadth, they wrote, “We maintain a defensive asset allocation and believe the risk-reward for equities remains poor.”

For many investors, the macroeconomic climate over the last few years has been unprecedented. The Federal Reserve was compelled to hold interest rates near historic lows to prevent the economy from collapsing and politicians were compelled to spend trillions of dollars on stimulus programs as a result of company closures caused by the pandemic. But company closures also disrupted supply lines, leading to a scenario where there was an excess of cash chasing an insufficient amount of commodities.

The Federal Reserve increased interest rates at their fastest rate; since the early 1980s as the epidemic’s effects started to fade and inflation rocketed to its highest level in four decades. Due to these difficulties, the S&P 500 entered a bear market and is currently losing 8%. But many analysts—including some of the Federal Open Market Committee members —believe that the abrupt tightening of lending standards will eventually trigger a recession. For instance, according to JPMorgan Chase analysts, there is a greater than 50% chance that the United States will experience a recession by the end of the year.

In research released last week, analysts at Deutsche Bank expressed a similar viewpoint, although with considerably more certainty. They estimate that the likelihood of a U.S. recession in the coming year is “near 100%,” and the group’s senior economist David Folkerts-Landau said that avoiding one would be “historically unprecedented” given the economic challenges we are currently facing.

There is nothing new under the sun, in the words of King Solomon: “The thing that hath been, it is that which shall be; and that which is done, is that which shall be done.” – History is cyclical.

The S&P 500 began its ascent towards new highs in all but one of the eight recessions that the United States has experienced during the last five decades. In fact, between the time the index lowest was reached and the bottom of the GDP, throughout those eight recessions, the index achieved a median return of 30%. In other words, By the time recessions conclude, stock market recoveries are often well underway.

Investors are forward-looking, which means they respond to events before they occur, which is why it occurs. For instance, the S&P 500 entered a bear market in January 2022 as a result of investor concern over a downturn in the economy. However, GDP increased by 2.1% in 2022, somewhat more than the long-term trend of 2%, indicating a robust rate of economic growth. But investors recognized the signs. They were aware that to combat inflation, the Federal Reserve would have to raise interest rates, which may then result in a recession.

Dow Jones Short (Sell)
Enter At: 33583.38
T.P_1: 33168.82
T.P_2: 32635.41
T.P_3: 32035.34
T.P_4: 31435.26
T.P_5: 30835.18
T.P_6: 30135.09
T.P_7: 29601.68
S.L: 34630.98

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